employees are compensated on the basis of seniority, in contrast to personal
connections or performance.
Workforce characteristics such as age, education level, qualifications and
experience, along with workforce tastes and preferences, and labour relations
factors such as the nature of the employment relationship, for instance the level
of trade union involvement within MNCs, will result in different international
compensation approaches. Finally, if the strategic role of each subsidiary varies,
then this is likely to influence international compensation strategy.
In addition to the internal environmental variables, the external environ-
ment also influences the nature of international compensation in MNCs.
Relevant external elements include the nationality of the parent country, in
terms of culturally determined values and attitudes towards compensation
policy and practices. Local culture influences international compensation strategy
through the dominant societal values, norms, attitudes and beliefs concerning,
for example, bases for compensation differences (for example, performance,
family connections, gender), degrees of compensation differences between
managerial and non-managerial employees, and the propensity for using parti-
cular types of compensation (such as pay incentives and benefits). Other influ-
ences include labour market characteristics of supply and demand, and the
education and skill levels, ages and experience of those in the labour market.
The roles of home and host country governments in labour relations will also
affect the level of government regulation of the labour market and the employ-
ment relationship, including compensation of the workforce.
Referring to Porter’s (1986) typology, O’Donnell (1999) has recently con-
cluded that international compensation strategy will vary according to industry
type. For example, she cites evidence from two global industries, scientific mea-
suring and medical instruments, that MNCs competing in a global industry may
be more likely to allocate rewards based on corporate and regional performance,
rather than on subsidiary performance, as favoured by MNCs competing in a
multidomestic industry (see Chapter 2 for a discussion of these different industry
types). Further, different industry sectors also have different norms and practices
for international compensation. For example, service-sector and high technology
MNCs have been more likely than manufacturers to incorporate equity-based
options in their international compensation strategies (Butler, 2001).
Competitors’ strategies will influence international compensation strategy.
Even if the MNC is not seeking to be a market leader in international com-
pensation, it generally cannot afford to fall behind market rates across its loca-
tions, as it will risk losing valuable employees to competitors.
As indicated in Figure 12.1, the internal and external environments of
MNCs will largely determine the staffing orientations they adopt. As discussed
in Chapter 10, MNCs commonly adopt ethnocentric, polycentric, regiocentric,
geocentric or a mixture of these staffing orientations (Dowling et al., 1999).
Traditionally, these orientations referred to staffing senior management posi-
tions in MNCs (Heenan and Perlmutter, 1979). The nature of international
312 International Human Resource Management